In search of the real Foreign Business Act (10-01-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Everyone is familiar with laws that exist but are never enforced.
Sudden enforcement of laws never before enforced can be surprising.
Why these laws were not enforced from the beginning is a natural question.
The Foreign Business Act is an important example of such a law.
There is a large difference between what the law says and the way the law is enforced.
Foreign companies doing business in Thailand might argue that they have retained majority voting rights to better achieve their business objectives and protect their investment.
Technically, foreign holding of majority voting rights appears to be against the law, but the law was never enforced, so for many years there was effectively another law.
Normally, one assumes that "owner" of a company means having three kinds of rights: 1. the right to receive company profits, 2. the right to make company decisions (voting rights), and 3. the right to call yourself the owner of the company.
If you relax this commonsense assumption, then a Thai "nominee shareholder" can have right #3 without rights #1 and #2. A foreign shareholder actually made the decisions and received the profits from the company. This was a "loophole" in the Foreign Business Law that avoided the law without breaking the law.
The big question is what will happen when the effective law suddenly changes, a law that foreign businesses have followed and grown accustomed to.
Will Foreign Direct Investment decrease?
Will a decrease in foreign voting rights also decrease the value of the Foreign Direct Investment that already exists?
What implications might this have for the Thai stock market?
Is this new enforcement just a small part of a long-term cycle of alternating strict and lax enforcement?
In the short-run who will be the winners and losers from the change?
In the long-run who will be the winners and losers from the change?
One justification argues that the change increases transparency that will actually strengthen foreign investor confidence and increase Foreign Direct Investment in the future.
How long will it take for this "transparency effect" to kick in?
Another justification argues that it is time that the industries promised to Thai businesses, actually be restricted to Thai businesses.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What change was made to Thailand's Foreign Business Act yesterday?
2. How could the change be dangerous?
3. How will the changes improve the investment climate, according to the government?
4. How long are foreign companies being given to come into compliance?
5. Will the new law apply to all businesses with Foreign Direct Investment?
6. Do the expectations of the government regarding the changes match those of the Thai and foreign business communities in Thailand?
7. How might the changes make the business environment more equitable for Thais in list 1 and 3 industries? What about list 3 industries?
8. What industries should be removed from list 3 and put under their own laws, according to the government?
9. How will the law be enforced?
Bangkok Post Article: January 10, 2007
FBA changes get cabinet approval
Limits on foreign holdings 'dangerous' POST REPORTERSThe cabinet yesterday approved in principle amendments to the 1999 Foreign Business Act that limit foreign investors to holding no more than 50% of the shares or voting rights in Thai companies. Economic ministers insisted the changes would help improve the investment climate as they would boost compliance with the law.
But deputy Democrat leader Kiat Sittheeamorn charged that it was a "dangerous move" that would undermine confidence in the country.
Businesses which violate the rules on voting rights will be required to inform the Commerce Ministry within one year. Those in violation of the foreign ownership limit will have to reduce their holdings to 49% within two years. The new law will apply to businesses on Lists 1 and 2, but exempt most businesses on List 3. The cabinet will forward the draft amendment to the Council of State for its constitutionality to be checked.
Deputy Prime Minister and Finance Minister M R Pridiyathorn Devakula said the amendment would ease uncertainties over the country's regulatory framework, after an investigation which began last year into nominee issues with Kularb Kaew Co, a shareholder of Shin Corp.
"If we leave the matter as it is, businesses will remain uncertain of their compliance with the law. New investment is unlikely to happen," he said.
The current law allows some foreign businesses to dominate ownership of Thai firms through majority voting rights, the finance minister said.
But Mr Kiat said there were "other things" the government should have done. "So far it has chosen to implement measures that undermine confidence in the country's economy. First, capital controls. Now, the foreign business law," he said.
He called on the government, in particular the Commerce Ministry, to clarify why it needed to impose the rule.
The regulation was likely to draw protests from investors who would find more favourable terms in other Asian countries like Vietnam and China, Mr Kiat said.
"This is a dangerous move for the country. It is unlikely to benefit the nation."
M R Pridiyathorn believed the impact on the investment climate would be slight as businesses under all three lists of the current law total 10,00-20,000 companies, compared with the total of 500,000 foreign-owned businesses in the country.
"In considering the amendment, we have taken into account the impact on the investment climate. The country has allowed improper procedures to prevail for a long time. We want to nurture the investment climate. This amendment will help clear the air," M R Pridiyathorn said.
He noted the government had exempted List 3, which mainly comprises companies in the service sector, because local operators on the list appeared to have adapted to active foreign participation.
Commerce Minister Krirk-krai Jirapaet said the move was part of the government's efforts to close the loopholes abused in the past. Foreign companies had used these loopholes to operate in businesses restricted to Thais, he said. The amendment was likely to make investors feel more optimistic about investing in Thailand.
"I do not think that foreign investors should take this as a negative move. On the contrary, it should help increase confidence as there have been abuses in the past," Mr Krirk-krai said. "The investment environment should improve and so should corporate governance, and the new laws will make things more progressive," he added. Separating some industries from List 3 to come under their own laws, such as banking and insurance, would be beneficial to the country in the long run, the minister said.
Kanissorn Navanugraha, director-general of the Business Development Department, said his department would start to make random checks on companies listed on the Stock Exchange of Thailand, especially those that fall under Lists 1 and 2 to see if they are in breach of the law or not. However, this will be done after the voluntary 90-day registration has expired. He said there are 40,000 foreign investors listed on the SET among the 500 odd firms on the local bourse.
Vocabulary (in discussion above)
in principle - regarding the general idea
approved in principle - the general idea is approved (but the details have not been worked out)
1999 Foreign Business Act - Thailand's current law that regulates how foreign businesses can conduct business in Thailand
deputy - the second most important person in an organisation (acts for the more important person when they are not there)
undermine - weaken, make less strong
undermine confidence - decrease peoples' trust and belief in something by doing something
the investment climate in x - whether most investors are positive or negative about investments at x
exempt, exempted - don't have to follow a law or rule that others have to follow
List 3 - businesses from which foreign companies are excluded because "Thai nationals are not yet ready to compete with foreigners." Service businesses including banking, insurance, hotels, tours, selling food and beverages, wholesale, small scale retail, and most construction. Professional services are also included such as such as accounting and legal services, advertising, architecture, and auctions. Agricultural industries include rice milling, flour production, fisheries, forestry and the production of various kinds of wood, and plant cultivation. Lime production is also included.(See Foreign Investment in Thailand: Review of the Current Legislative Regime, page 16)
draft - preliminary, incomplete, early version of a piece of writing (still can be discussed, debated, and changed, not the final version)
amendment - an addition to a law or rule
draft amendment - the early version of additions to a law (that can still be discussed and changed)
Council of State - group of legal experts that checks new laws to determine whether they violate the constitution
constitutionality of a regulation - whether the regulation violates articles in the constitution
ease uncertainties -increase certainty (so that people know what the laws actually mean)
regulatory framework - system of rules and regulations to deal with problems in a certain area (for example Thailand's current foreign exchange regulatory framework now includes short-term capital controls)
a nominee, a nominee shareholder - a Thai national who holds shares in a company for the real foreign owner
Kularb Kaew Co - the holding company that allegedly is a nominee shareholder for Shin Corporation (See Wikipedia on the Shin Sale Controversy and Shin Corporation)
compliance - following the details of a law (not breaking the law)
come into compliance - make changes in behaviour so that one follows the details of the law (and is no longer breaking the law)
majority voting rights - when someone holds more than 50% of the voting rights in a company so they voting and corporate governance
prevail - be accepted and gain influence
clear the air - to make the situation less tense and uncertain (relieve emotional tensions)
loopholes - legal ways to avoid a law (parts of a law that allows people to violate the spirit of the law without actually breaking the law)
corporate governance - the running of a company, "the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large." (Source Wikipedia)
progressive - having modern ideas about how things should be done (instead of old traditional ones)
random checks - investigations without warning (to see if someone is violating the law)
voluntary - not required
500 odd firms - roughly (or approximately) 500 companies
Answer Key:
1. What change was made to Thailand's Foreign Business Act yesterday?
Thailand's Foreign Business Act was changed to "limit foreign investors to holding no more than 50% of the shares or voting rights in Thai companies."
Foreign companies that hold majority voting rights would have to give them up.
2. How could the change be dangerous?
It could "undermine confidence in the country's economy."
3. How will the changes improve the investment climate, according to the government?
They say they are expecting the investment climate to get better because the legal changes will "ease uncertainties over the country's regulatory framework."
The argument runs that the Shin Corporation case has increased uncertainty among foreign companies over whether they comply with Thailand's Foreign Business Act or not.
The new changes will help them determine whether they are in compliance with the law or not.
Future investment will be more certain that they are in compliance with the law when they make their investment which should increase investment in the long-run.
("Deputy Prime Minister and Finance Minister M R Pridiyathorn Devakula said the amendment would ease uncertainties over the country's regulatory framework, after an investigation which began last year into nominee issues with Kularb Kaew Co, a shareholder of Shin Corp...'If we leave the matter as it is, businesses will remain uncertain of their compliance with the law. New investment is unlikely to happen,' he said.")
4. How long are foreign companies being given to come into compliance?
Two years.
("Those in violation of the foreign ownership limit will have to reduce their holdings to 49% within two years.")
5. Will the new law apply to all businesses with Foreign Direct Investment?
No only those on lists two and three. List three is exempt. List three contains services such as banking, insurance, hotel, restaurant, and tourism businesses as well as professional services. See the definition of "List 3" in the vocabulary section for more information.
("The new law will apply to businesses on Lists 1 and 2, but exempt most businesses on List 3.")
6. Do the expectations of the government regarding the changes match those of the Thai and foreign business communities in Thailand?
The foreign business community has already spoke out against the changes. (See today's Bangkok Post, Business, page B1, 10-01-07)
No formal statements by the Thai business community have been made yet.
The main argument runs that less favourable investment terms will make Thailand less attractive for FDI, so Thailand might lose some FDI to other countries such as Vietnam and China.
("The regulation was likely to draw protests from investors who would find more favourable terms in other Asian countries like Vietnam and China, Mr Kiat said.")
7. How might the changes make the business environment more equitable for Thais in list 1 and 3 industries? What about list 3 industries?
Industries that were meant to be restricted to Thais will now actually be restricted to Thais.
List 3 companies appear to have already "adapted to active foreign participation."
("He noted the government had exempted List 3, which mainly comprises companies in the service sector, because local operators on the list appeared to have adapted to active foreign participation...Foreign companies had used these loopholes to operate in businesses restricted to Thais, he said.")
8. What industries should be removed from list 3 and put under their own laws, according to the government?
Banking and insurance.
9. How will the law be enforced?
After 90 days the government will start by random checking of companies on SET with foreign investment.
A grace period of one year will be given to companies to inform the government if they are not in compliance.
("Separating some industries from List 3 to come under their own laws, such as banking and insurance, would be beneficial to the country in the long run, the minister said.")
("Businesses which violate the rules on voting rights will be required to inform the Commerce Ministry within one year...Kanissorn Navanugraha, director-general of the Business Development Department, said his department would start to make random checks on companies listed on the Stock Exchange of Thailand, especially those that fall under Lists 1 and 2 to see if they are in breach of the law or not. However, this will be done after the voluntary 90-day registration has expired.")
